Blog for Trading Success

Yesterday we laid the theoretical foundations for the analysis of May 14’s price action. Today we’ll start on the recap of my trade journal.

I provided the context in “ES 05-14-2008 Video (http://tradingsuccess.com/blog/es-05-14-2008-346.html). So, let’s start the blog with the first snapshot I took - the one I took during the ‘B’ period (Figure 1). At that stage, I observed:

• The probability of a trend day up because of the ‘open-gap’ pattern (http://tradingsuccess.com/blog/sp-intraday-2-169.html). Instead of making any attempt to close the ‘open-gap’, the market went straight up from the open.
• The range of the ‘A’ period is only 8 points - ATR is 22 + 10, -5 standard deviations. This small range for the ‘A’ period also suggested a trend day because of the context and because the open and subsequent price activity was above the previous day’s value area.
• Market Delta identified 1409 as the probable low of the day - note the -151 Delta volume, light red.

FIGURE 1 ‘B’ Period

Figure 2 shows the Delta Volume to 11:00 am

FIGURE 2 Delta Volume

No trade yet.

Figure 3 shows the completion of the Initial Balance.

FIGURE 3 Initial Balance

At the end of “C”, I decided that:

• The market was forming a Double Distribution Trend Day.
• I wanted to be a buyer from 1414.75 to 1412.5
• If I was wrong the market would rotate past 1412.5 and re-print the opening price. I expected that at the worst 1410.5 would hold (beginning of point of inflection).
• Stops were placed at 1378.75 with the intention of raising them to just under the lows of the day once the market had a Range Extension establishing the neckline of the double distribution.
• Target for the move 1467.75. The risk reward was marginal. I decided to take the trade because if correct, the stops would be brought up to 1407.75 relatively quickly; most importantly, if I was wrong, I felt I’d have time to exit with little loss.

I entered the market in the 1414 to 1412.75 range.

Figure 4 shows the Delta at 11:45 am. The high volume at the top of the range suggested continuation and that the trend day was alive and well.

FIGURE 4 11:45

Figure 5 shows “I” period breakout. When the market rotated back into the day’s range, it raised an amber flag to the Trend Day Scenario and raised the possibility of a Failed Trend day (which meant the possibility of a Bearish Neutral Day if we closed in the lower quadrant of the range). As readers know, I hold the “J” (2:30 am EST) and “K” (3:00 am EST), to be the critical time periods for the ES. May 14 proved to be no exception.

FIGURE 5 ‘I’ Period

In ‘K’, the market attempted to push up and failed (note the large volume at 1420.5). When the market started to rotate back down, I exited all longs at prices ranging from 1417.50 to 1416.00

FIGURE 6 Delta Volume

Figure 7 shows a split of the Profile of May 14. Note that if I had been trading poorly, I’d have been stopped out at 1407.75 and suffered a small loss rather than making a small profit. I know of no other tool except Market Profile that gives me the sort of analytical power that enables early exit.

FIGURE 7 Market Profile EOD

So a great day! I was wrong about the market’s structure and direction and managed to make money. Boy, I’d love to do that every day of the week!

I believe my bottom line is showing improved results because I adopted the method suggested in ‘The Psychology of Intelligence Analysis’. By continually adopting a mindset that my view of the market is unproven; and then seeking to ’see’ what has to happen to prove it or disprove it, I am able to exit with reduced or no damage. Now, my old processes - ‘what has to happen for me to stay in? What has to happen for me to exit?’ - are similar with one critical difference: by using the word ‘UNPROVEN’ for my entry scenario, I find I am less likely to get myopic.

Speaking of ‘The Psychology of Intelligence Analysis’…… I draw your attention to the Announcement.

On Saturday May 24 at 10:30 PM EST, I’ll be holding a webinar on the methods I derived from the Psychology of Intelligence Analysis. The webinar will go for about 90 minutes.

There is no cost but it would be best if you have read the Nature of Trends.

I have 4 seats on a first come first serve basis. Drop me a line at ramonbarros@tradingsuccess.com

I thought a nice way to round off this series would be to show how I use Market Profile and Market Delta to enter position trades. The same approach can be used to day trade; indeed, when trades don’t work out, that’s what my entries become.

I decided that the best format to do this would be to provide snapshots taken off the cam file, This would be better than attaching the whole cam file - I am not much of an editor and who wants to sit through a few hours of tedium watching someone else trade.

That is the good news - the bad news is my back is very painful tonight so I am going to cut this blog short. I’ll introduce the subject and finish it over the next day or two.

So let’s begin. The first item on the agenda is to explain the Market Delta Footprint charts (http://www.marketdelta.com/).

Figure 1 shows a Footprint chart around 11:00 am EST. The shades of green in the columns represent light to heavy buying volume (the darker the greater the buying volume) and the shades of red represent light to heavy selling volume. The numbers in the columns represent the difference between the buying and selling volume at the price. So at 1414, there were 984 more buying contracts than selling.

The blue numbers at the bottom of the page represent the total volume for the period; the green and red numbers tell me if there were more buyers than sellers and by how much. Like the column numbers, the darker the number the greater the buying or selling volume.

Market Delta has three levels of buying or selling intensity: light, moderate and dark representing a small difference, a moderate difference and a great difference between the buying and selling volume.

The next item on the agenda is to explain the Market Delta Profile charts. For those unfamiliar with the Profile, please go to:

http://www.cbot.com/cbot/pub/page/0,3181,1168,00.html

The Market Delta Profiles I use have two differences to the traditional ones:

1. My Initial Balance is three periods i.e. ‘A’ to ‘C’.
2. My value area, and Point of Control are volume based rather than TPO (time price opportunity) based.

I wrote why I use three periods instead of two in “The Initial Balance: Two or Three 30-Minute Periods?” (http://tradingsuccess.com/blog/the-initial-balance-224.html). Here I’ll briefly state why I prefer to use volume rather than TPOs.

Peter Steidlmayer based the use of TPOs, in effect, on this premise:

Time x Price = Volume.

When the Profile was first introduced obtaining timely volume data was difficult. Nowadays it is readily available to all. So why use a surrogate rather than the original? More importantly, I found that using Volume rather TPOs improved my bottom line by over 3% - not a figure to be sneezed at.

Let’s turn to a brief description of the Profile.

In Figure 2:

• The light grey area is the Volume Profile
• The Magenta Bar is the Value Area
• The Brown Bar the Initial Balance
• The Black line with some numbers, the Point of Control and the Volume Count. The Volume Count serves the same function as the TPO Count.
• The single Horizontal Lines with one price are support and resistance areas.

OK - tomorrow we look at the ‘good stuff’. Stay tuned!

FIGURE 1 Footprint

FIGURE 2 Market Profile

I received an e-mail asking, among other things, that I post an example of my analysis process. Here is a general outline. I opted for a video rather than a written example.

http://www.tradingsuccess.com/download/140508/140508.html

In my travels as an educator, it saddens me to see so many fail despite working hard. But trading requires that we work SMART and HARD not just that we put in some sort of effort.

There are many, of course, who are looking for the ‘way to make a million that requires no effort, no capital and involves little loss’. This is a word-for-word question I was once asked. I told him: “Hmm if you know of such a method, I’ll be your student”. Some just don’t deserve to succeed.

But others put in effort, time and money; yet they experience the same lack of success. From my experience, the lack of success comes because they refuse to acknowledge that their actions are leading to failure. Instead they engage in bouts of rationalizations that would be funny if it were not so tragic.

Let me paint you a couple of pictures:

A close relative, Adam, has been trading as long as I have. Until recently he firmly held the view that he was a successful trader. Well, it is true he made profitable trades 90% of the time; but unfortunately, he never made money in any year! If you remember the Expectancy Formula, you’ll know why:

(Average $Win x Win Rate) - (Average $Loss x Loss Rate) MUST be greater than 1. If the result is a minus, then you must lose over a large sample size. (For a fuller description see The Nature of Returns) .

Adam never kept an equity journal, let alone a psychological journal. His way of dealing with losses was not to open the statements. Whenever I visited him, I could tell at a glance how he was doing by noticing the pile of unopened trading statements. If it was a large pile, he was losing; a small one meant he was winning. His refusal to face the ‘true’ results kept him from remedying the problem.

Let me now turn to Bob. Bob had almost completed the STC mentor course. He knew his stuff, but the knowledge was not being translated into profits. The problem was, once in a trade, Bob became myopic. Any information that did not support his mindset would be filtered out. Bob’s saving grace was he had learnt to faithfully place stops.

I saw in Bob a great potential to succeed. If I could find a way through the myopia, I knew his results would improve tenfold. The good news is we did find a way and when Bob completed STC, he had an approach he had learnt to execute consistently.

So, what about you? In which camp do you fit? Will you change to succeed? Or will you dig your heels in and stay within your comfort zone? Ultimately success or failure falls on your shoulders alone. That’s the beauty of trading.

I have added to the blog two give-aways:

1. Notice the ‘Free Stuff’ menu item. Click on it (Figure 1)
2. You’ll see the full series by Paul Levine on MIDAS and a video showing how I calculate the Barros Swings. (Figure 2)

FIGURE 1

FIGURE 2